Meaning Of Cost

“The amount of expenditure

incurred on or attributable to a given thing” Meaning of CostingCosting is defined as “the technique and process of ascertaining costs”. Meaning of Cost Accounting

"the process of accounting for cost

which begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and con­trolling costs." Meaning of Cost Accountancy• “the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making.” Objectives of Cost Accounting• Ascertainment of cost.• Determination of selling price.• Cost control and cost reduction.• Ascertaining the profit of each activity.• Assisting management in decision­ making. Difference between Cost Reduction and Cost Control• Cost control aims at maintaining the costs in accordance with the established standards. While cost reduction is concerned with reducing costs.• Cost control seeks to attain lowest possible cost under existing conditions. While cost reduction recognises no condition as permanent, since a change will result in lower cost. Difference between Cost Reduction and Cost Control• In case of Cost Control, emphasis is on past and present while in case of cost reduction it is on present and future.• Cost Control is a preventive function, while cost reduction is a corrective function. It operates even when an efficient cost control system exisis.• Cost control ends when targets are achieved while cost reduction has no visible end. Importance of Cost Accounting• Control of cost (material,labour,overhead).• Measuring efficiency and compensating the employees in a better way.• Budgeting• Price determination• Provides useful information to creditors, investors and bankers.• Provides aid to management.• Benefits to the government and society. Limitation of Cost Accounting• Estimation• Difference of item• Not independent Reports By Cost Accounting Department• Cost sheets.• Consumption of material statements,.• Labour utilisation statements.• Overheads• Sales effected compared with budgets,.• Reconciliation of actual profit earned with estimated or budgeted profit.• The total cost of abnormally spoiled work in the facto­ry and abnormal losses in the store. Reports By Cost Accounting Department• The total cost of inventory carried, analysed into raw materials in chief stores and other stores.• labour turnover, and the cost of recruitment and train­ing of new employees.• Expenses incurred on Research and Development• Reports about particular departments and operations (like trans­port or power generation) Advantages of a Cost Accounting System• Identifying unprofita­ble activities, losses or inefficiencies in any form.• The application of cost reduction techniques.• Identifying the exact causes for decrease or increase in the profit/loss of the business.• Information and data to the management making decisions.• Cost Accounting is quite useful for price fixation. Advantages of a Cost Accounting System• Points out the deviations from the pre­ determined level(variance analysis)• Cost comparison helps in cost control• The cost of idle capacity can be easily worked out• The use of Marginal Costing technique, may help the execu­tives in taking short term decisions Essential factors for installing a Cost Accounting system• Objective• Type of Business• General organisation .• The Technical Details• Change in operations• Method of maintenance of cost records• Information• Accuracy• Informative and Simple Essentials of a good Cost Accounting System• Informative and Simple• Accuracy• Support from Management• Cost­ Benefit• Precise Information• Procedure• Trust Comparison betweenManagement Acct and Financial AcctFinancial Accounting Management Accounting• Objective • ObjectiveTo maintain account to determine financial position of business. To help management to formulate policies and plan. Management Accounting and Financial Accounting• Nature • NatureIt deals with historical • It deals with projection of data. data for the future. • Subject matter• Subject matter M.A deals separately withF.A assess the result of different units, deptts.etc. the whole business. Management Accounting and Financial Accounting

• Compulsion • CompulsionPreparation of F.A is Preparation of M.A is compulsory by law. not necessary by• Precision law.It records the exact • Precision figures of the It considers transactions. approximate figures. Cost and Management Accounting• Cost Accounting • Management Accounting1. It records the 1. It records both quantitative aspect qualitative and of a transaction quantitative aspect

2. It records the cost of 2. Provides information

producing a product to management for and providing a planning and co­ service ordination Cost and Management Accounting • Mgmt Accounting• Cost Accounting 3.It is wider in scope as it3. It only deals with cost includes F.A, budgeting, Tax, Ascertainment. Planning. 4. It is concerned with the4. It uses both past and projection of figures for present figures. future.Cost and Management Accounting • Management• Cost Accounting Accounting5. It’s development is 5. It develops in related to accordance to the industrial modern business revolution. world.6. It follows certain 6. It does not follow any principles and specific rules and procedures for regulations. recording costs of different products Cost Object• Anything for which a separate measurement of cost is desired• Cost Object Example• Product Four Wheeler• Services Airlines• Project Delhi Metro Cost Centre• Location, person or an item of equipment (or group of these) for which cost may be ascertained and used for the purpose of Cost Control• Production Cost Centre : material is handled for conversion into finished product.. Machine shops, welding shops.• Service Cost Centre : Serves as an ancillary unit to a production cost centre. Power house, gas production shop Cost Unit• Unit of product, service or time (or combina­tion of these) in relation to which costs may be ascertained or expressed.• Industry or Product Cost Unit Basis• Automobile Number• Cement Tonne/per bag• Chemicals Litre, gallon, kilogramCLASSIFICATION OF COST1. Classification By Nature Or Element.2. Functional Classification.3. Classification On The Basis Of Behaviour.4. By Controllability5. By Normality6. Costs For Managerial Decisions Making 1.CLASSIFICATION BY NATURE OR ELEMENT

• Normal cost ­ Cost normally

incurred at a given level of output• Abnormal cost ­ Cost not normally incurred .Charged to Costing Profit and loss Account. Costs For Managerial Decisions Making• Avoidable and unavoidable costs:­ Avoidable costs are those costs which can be escaped or avoided if some activity of the business to which they relate is discontinued. Unavoidable costs are those can cannot be escaped or eliminated. Costs For Managerial Decisions Making• Shut down and sunk costs:­ Those fixed costs which have to incurred even if productions or operations of an undertaking are discontinued temporarily due to certain reasons such as strike, storage of raw material, etc, are called shut down costs. Costs which have been incurred and are irrelevant in particular situation are called sunk costs. Costs For Managerial Decisions Making• Product costs and period costs:­ Cost which are associated with production and which become part of the costs of the product are called product costs. Raw material, direct wages, etc.• Costs which are not associated with production or which are associated with period for which they are incurred are called period costs. Administration costs, rent, insurance, salesmen salaries CONT……• Differential, incremental and decremental costs:­ The difference­in­costs due to the change in the level of activity or the method of production is known as ‘differential costs’. In case, the change increases the costs, it is called incremental costs, and in case, the change decreases the costs, it is called decremental costs. CONT……• Out of pocket costs:­ It is that costs which gives rise to cost expenditure as opposed to that cost which do not involve any cost expenditure, e.g. depreciation of of an asset owned is not an out of pocket cost. The out of pocket cost are important for price fixation during rereccession and where make or duy decision is involved. CONT……• Marginal cost:­Marginal cost is the cost of producing one additional unit. The marginal costs concept is based on the distinction between fixed and variable costs. Marginal cots is the total of variable costs only and fixed costs are ignored for the purpose of marginal cost. The concept of marginal cost is very useful in making many managerial decisions such as, price fixation make or by decision. CONT……• Opportunity costs:­ Opportunity costs refer to the advantages of forgone as a result of adopting one course of action and not the other. For example, if an owned building is proposed to be used in a project, the expected rent of the building is the opportunity cost that must be taken into consideration while evaluating the profitability of a project. CONT• Conversion cost:­ It is the cost of converting or transforming raw material. Into finished product. Conversion cost can also be calculated as the total of direct labour, direct expenses and chargeable factory overheads. CONT……..• Budget cost and standard cost:­ Budget cost are estimated priority a defined period of time. Standard cost is a' predetermined cost based on technical estimate for materials, labour and overheads for a selected period of time and for prescribed working conditions. Standards costs are best upon technical assessments whereas budgets are based on technical costs adjusted to future trends. CONT…….• Imputed or hypothetical costs:­ These costs do not involve expenditure in real sense. They are included in cost accounts only for taking managerial decision for e.g. the rent of owned building or interest on owned capital should be taken into consideration while evaluating the profitability of a project. these costs are also called Notional costs. CONT…….• Absolute cost ­ These costs refer to the cost of any product, process or unit in its totality. When costs are presented in a statement form, various cost components may be shown in absolute amount or as a percentage of total cost or as per unit cost or all together. Here the costs depicted in absolute amount may be called absolute costs and are base costs on which further analy­sis and decisions are based. CONT…….• Engineered costs ­ These are costs that result specifically from a clear cause and effect relationship between inputs and outputs. The relationship is usually personally observable.• Examples of inputs are direct material costs, direct labour costs etc.• Examples of output are cars, computers etc. CONT…….• Estimated cost ­ Kohler defines estimated cost as “the expect­ed cost of manufacture, or acquisition, often in terms of a unit of product computed on the basis of information available in advance of actual production or purchase”.. CONT…….• Explicit Costs ­ These costs are also known as out of pocket costs and refer to costs involving immediate payment of cash.• Salaries, wages, postage and telegram, printing and stationery, interest on loan etc. are some examples of explicit costs involving immediate cash payment.• Implicit Costs ­ These costs do not involve any immediate cash payment. They are not recorded in the books of account. They are also know as economic costs. CONT…….• Estimated cost ­ Kohler defines estimated cost as “the expect­ed cost of manufacture, or acquisition, often in terms of a unit of product computed on the basis of information available in advance of actual production or purchase”.. METHODS OF COSTING

2. Contract Costing Or Terminal

Costing. (Road ,building)

3. Departmental Costing. METHODS OF PROCESS COSTING

1. Single Output Or Unit Costing .(Bricks)

2. Operating Costing. (Transport)

3. Operation Costing. METHODS OF COSTING• Multiple Costing: It is a combination of two or more methods of costing outlined above. Suppose a firm manufactures bicycles including its components; the parts will be costed by the system of job or batch costing but the cost of assembling the bicycle will be computed by the Single or output costing method. The whole system of costing is known as multiple costing. CODING SYSTEM• “a system of symbols designed to be applied to a classified set of items to give a brief account reference , facilitating entry collation and analysis”the first digit is 1, the system implies that it refers to raw material and if the number is 2 it represents a labour cost. The second and third numbers relating to 1 CODING SYSTEM• raw material, provide details of the type e.g., whether the raw material is an electronic component (number 4), mechanical component (number 1) consumables (number 2) or packing (number 3) and the name respectively. Hence the description of a cost with a code 146.729 shall be understood as follows: CODING SYSTEM• Since the first number is 1 the cost refers to raw material cost• The second number being 4 indicates that the raw material is an electronic component.• The third number 6 refers to the description which according to the company’s codification refers to DiodesAdvantages of a coding system• Short and simple• Clarity.• Computer friendlyThe requirements for an efficient coding system • Unique • Flexibility. • Brief • Centralised • Similarity